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http://www.ft.com/cms/s/0/20802e26-1e12-11e3-a40b-00144feab7de.html#ixzz2f3VWpQSH By Claire Jones, Economics Reporter Banks piled into emerging markets at a record pace earlier this year, highlighting the scale of the global search for yield that has partially reversed since the US Federal Reserve said it intended to slow its bond buying. Cross-border lending to emerging markets surged by $267bn, to an estimated $3.4tn, in the first quarter of 2013, the Bank for International Settlements said on Sunday. The BIS said the 8.4 per cent increase was by far the highest recorded, with the amount of interbank lending rising by almost $200bn, or 12 per cent. The so-called central bankers’ bank, which compiles what are widely regarded as the most comprehensive set of statistics on cross-border capital flows, said in its latest Quarterly Review that 85 per cent of the rise was accounted for by more lending to China, Brazil and Russia. The publication of the figures comes as the US Federal Open Market Committee gears up for its policy meeting, ending on Wednesday, when it could decide the timing and pace at which it will slow its $85bn worth of monthly bond purchases. With interest rates close to zero across advanced economies and liquidity abundant as a result of their central banks’ mass bond-buying sprees, credit has flowed into emerging markets in recent years as lenders and investors sought higher returns. According to the BIS data, interbank lending to emerging markets in the Asia-Pacific region alone has doubled since the investment bank Lehman Brothers collapsed five years ago. Lending to emerging markets has shown signs of retrenchment since Ben Bernanke, chairman of the Fed, signalled in May that the US central bank had begun to consider unwinding its exceptional monetary stimulus. The expectation of a return to higher interest rates in advanced economies in the years ahead has led to a retreat – particularly from emerging markets with large current account deficits such as India – although the pace of that retrenchment has slowed in recent weeks. According to the BIS data, the record rise in cross-border lending to emerging markets in the first quarter mainly reflected buoyant interbank lending, while cross-border credit that was extended to borrowers in China rose by $160bn, or 31 per cent. With international demand for Chinese assets growing, companies in the world’s second-largest economy can borrow at cheaper rates from lenders abroad and are reliant on banks headquartered off the mainland for foreign-currency loans to help fund their expansion overseas. The BIS data showed emerging market companies were also increasingly turning to debt markets in offshore financial centres such as Hong Kong to secure funds. Chinese businesses’ borrowing through offshore financial centres has soared from less than $1bn between 2001 and 2002 to $51bn in the 12 months to June. Of these bonds, 16 per cent is denominated in renminbi, with most of the rest – 77 per cent – in dollars. Though there are restrictions on bringing capital into China, businesses apply for permission to bring funds borrowed abroad into the domestic market. Overseas lending to Brazil expanded by 14 per cent, or $34bn; for Russia, the figure was $29bn, an 18 per cent rise. Both were the largest quarterly increases on record. Euro area banks increased their lending to emerging markets for the first time since the second quarter of 2011. Lenders in France, the Netherlands, Germany and Luxembourg accounted for most of the growth. In contrast to the rapid rise in lending to emerging markets, cross-border claims on banks in the advanced economies slipped by $341bn, or 1.5 per cent. Though bank lending to emerging markets could remain strong as long as growth remains so, the end of quantitative easing and an eventual rise in interest rates in advanced economies are likely to slow the pace of cross-border flows. Additional reporting by Simon Rabinovitch. Taylor Scott International
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